OLD MUTUAL LIFE ASSURANCE COMPANY (SOUTH AFRICA) LTD

Transcription

1 OLD MUTUAL LIFE ASSURANCE COMPANY (SOUTH AFRICA) LTD CONSOLIDATED AND COMPANY ANNUAL FINANCIAL STATEMENTS 31 DECEMBER 2015

2 and Company Annual Financial Statements For the year ended 31 December 2015

3 Contacts Public officer Auditors J Baepi KPMG Inc. Chartered Accountants (SA) Registered Auditors 1 Mediterranean Street Foreshore Cape Town 8001 South Africa Postal address PO Box 66 Cape Town 8000 South Africa Registered office Company secretary Mutualpark Jan Smuts Drive Pinelands 7405 South Africa E M Kirsten Company registration number 1999/004643/06 Preparation supervised by I G Williamson Finance Director Post Graduate Diploma Actuarial Science, Bachelors of Business Science (Actuarial) These financial statements have been audited in compliance with the applicable requirements of the Companies Act of South Africa. 1

4 Index The reports and statements set out below comprise the consolidated and company's annual financial statements: Index Page Statement of directors' responsibilities 3 Certificate by the Company Secretary 3 Directors' report 4 Statutory actuary's report 7 Audit, Risk and Compliance Committee report 8 Independent auditor s report 9 Income statements 10 Statements of comprehensive income 11 Statements of financial position 12 Statements of changes in equity 13 Statements of cash flows 15 Accounting policies Employment equity report 111 2

5 Statement of directors' responsibilities Directors responsibility statement The directors are responsible for the preparation and fair presentation of the consolidated and company annual financial statements of Old Mutual Life Assurance Company (South Africa) Ltd, comprising the statements of financial position at 31 December 2015 and the income statements, statements of comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory notes, in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and the directors report. The directors are also responsible for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and for maintaining adequate accounting records and an effective system of risk management, as well as the preparation of the supplementary schedules included in these financial statements. The directors have made an assessment of the ability of the company to continue as a going concern and have no reason to believe that the business will not be a going concern in the year ahead. The auditor is responsible for reporting on whether the consolidated and company financial statements are fairly presented in accordance with the applicable financial reporting framework. Approval of consolidated and company annual financial statements The consolidated and company annual financial statements of Old Mutual Life Assurance Company (South Africa) Ltd, as identified in the first paragraph, were approved by the board of directors on 04 April 2016 and signed by: P G de Beyer D Macready Chairman Chief Executive Officer Authorised Director Authorised Director Certificate by the Company Secretary In terms of Section 88(2)(e) of the Companies Act of South Africa 2008, as amended, I certify that the company has lodged with the Commissioner, all such returns and notices as required by the Companies Act of South Africa and that all such returns and notices appear to be true, correct and up to date. E M Kirsten Company Secretary 04 April

6 Directors' report The directors of Old Mutual Life Assurance Company (South Africa) Ltd have pleasure in submitting their report on the consolidated and company annual financial statements for the year ended 31 December Review of activities The principal activity of the group is the transaction of all classes of life assurance, savings and retirement funding business. The group underwrites life insurance risks associated with death and disability. It also issues a diversified portfolio of investment contracts to provide its customers with asset management solutions for their savings and retirement needs. The operating results and financial position of the group and company are set out in the income statements, statements of comprehensive income, statements of financial position, statements of changes in equity, statements of cash flows and accompanying notes. Profit before tax for the group was R 4,284 million (2014: R 11,144 million), and R 2,903 million (2014: R 7,836 million) after tax. Profit before tax for the company was R 3,519 million (2014: R 16,270 million), and R 3,050 million (2014: R 13,276 million) after tax. 2. and company annual financial statements In terms of International Financial Reporting Standards ("IFRS"), the company is required to produce consolidated financial statements as its subordinated debt instrument is traded in a public market. In the company financial statements the company's investments in its subsidiaries, joint ventures and associate companies are accounted for as financial assets at fair value through profit or loss and dividends are recognised when receivable. Details of the company's interest in its principal subsidiaries, joint ventures and associates are set out in note Holding company The company's holding company is Old Mutual Emerging Markets Ltd incorporated in South Africa. 4. Ultimate holding company The company's ultimate holding company is Old Mutual plc incorporated in the United Kingdom and listed on the London, Johannesburg, Malawi, Namibia and Zimbabwe stock exchanges. 5. Share capital There were no changes in the authorised or issued ordinary or preference share capital of the company. 6. Dividends Ordinary shares Dividends on ordinary shares amounting to R 3,050 million (2014: R 2,817 million) were declared during the year by the group and the company. Preference shares Dividends on preference shares amounting to R 1,751 million (2014: R 1,053 million) were declared during the year by the group and R 1,751 million (2014: R 693 million) by the company. 7. Public interest score The company's public interest score, as determined in accordance with the relevant provisions of the Companies Act, of South Africa 71 of 2008, is

7 Directors' report 8. Directors The directors of the company during the year were as follows: Name P G de Beyer D Macready N T Moholi C W N Molope R T Mupita K Murray I G Williamson B M Rapiya P G M Truyens The directors currently holding office are: Executive directors R T Mupita I G Williamson f D Macready (Chief Executive Officer) B M Rapiya (Deputy Chairman) Independent directors P G de Beyer ca C W N Molope ar P G M Truyens ar, ca N T Moholi ar, ca Nationality South African South African South African South African South African British South African South African Dutch Changes Appointed 1 May 2015 Resigned 31 July 2015 Appointed 1 August 2015 ar ca f Member of the Audit, Risk and Compliance Committee Member of the Customer affairs Committee Member of the Financial Assistance Committee Mr R T Mupita, Mr B M Rapiya and Mr P G M Truyens were due to retire by rotation. Mr D Macready and Mr I G Williamson, who were appointed during the year, also retired at this meeting. All the Directors, being eligible, and having been recommended for reelection by the Board of Directors, offered themselves for re-election. 9. Company secretary Ms E M Kirsten is the company secretary. Registered office Mutual Park Jan Smuts Drive Pinelands 7405 South Africa Postal address PO Box 66 Cape Town Auditors KPMG Inc. has been nominated to continue in office in accordance with section 90 of the Companies Act of South Africa. 5

8 Directors' report 11. Events after the reporting period Prior to year end a subsidiary received loan funding from Standard Bank to acquire a 50% interest in a commercial property outside Nairobi, Kenya. Collateral provided to Standard Bank includes a guarantee issued by two subsidiaries in Old Mutual Real Estate Holding Company Pty Ltd and K (South Africa) (Pty) Ltd and a mortgage over Cavendish Square and Cavendish Connect to the value of R2.2 billion. The mortgage was registered on 28 January On 24 February 2016 the Minister of Finance of the Republic of South Africa announced an increase in the capital gains tax inclusion rates for companies. As a result capital gains tax will be levied at an effective rate of 22.4% compared to 18.6% in the past. The result of the increase is that higher capital gains tax will be paid in the future and consequently deferred tax liabilities or deferred tax assets on unrealised capital gains or capital losses should be measured at the higher effective capital gains tax rate. If the increase was effective for the financial year ended 31 December 2015, the relevant shareholder deferred tax liabilities and tax expense for the period ended 31 December 2015 would increase by R401 million. The increase in the inclusion rates will be effective for the financial year ending 31 December To protect policyholder interests, Treasury proposed that unrealised capital gains tax at 29 February 2016 be considered and realised through the deemed sale of the related assets and therefore taxed at the previous effective capital gains tax rate. From 1 March 2016 the disposed assets will have a capital gains tax base value equal to the disposal value of the assets at 29 February The estimated capital gains tax payable as a result of the disposal is R 1,819 million at 31 December Any capital gains on these assets and new assets subsequent to 1 March 2016 will be taxed at the revised effective capital gains tax rate. 12. Going concern The Board has satisfied itself that the group and company have adequate resources to continue in operation for the foreseeable future. The consolidated and company financial statements have accordingly been prepared on a going concern basis. 13. Corporate citizenship and non-financial reporting The Old Mutual group publishes a separate responsible business report which covers operational activities of its business with respect to its material sustainability issues. 14. King III Our system of governance within the Old Mutual Emerging Markets group is informed by the King Report on Governance for South Africa, 2009 (King III). Regular review and assessment of our application of the King III principles indicate that the company generally conforms to all the principles recommended in the Code. 6

9 Statutory actuary s report I have conducted an actuarial review of the company as at 31 December 2015, according to applicable guidelines issued by the Actuarial Society of South Africa. Contracts classified as insurance and investment contracts with discretionary participation features have been valued using the Financial Soundness Valuation (FSV) method. Contracts classified as investment contracts (without discretionary participation in profit) have been valued at fair value as per IFRS 9, Financial Instruments. Policyholders reasonable benefit expectations have been taken into account in valuing policy liabilities. Further notes to this report, including a description of the valuation basis, are provided in notes 42 and 45 to the consolidated and company annual financial statements. Sample derivative contract prices derived from the calculation of market-consistent investment guarantee reserves are provided in note 41. Actuarial Balance Sheet Rm Rm Published Statutory Published Statutory Total value of assets 620, , , ,181 Actuarial value of policy liabilities (518,978) (519,100) (492,651) (488,028) Unsecured subordinated callable notes (5,733) (5,733) (3,996) (3,996) Provisions and other liabilities (47,829) (47,779) (40,360) (40,289) (572,540) (572,612) (537,007) (532,313) Excess of assets over liabilities 47,552 46,548 49,225 51,868 Less: Inadmissible for statutory solvency purposes (739) (495) Less: Limits on group undertakings (9,408) (7,601) Add: Unsecured subordinated callable notes 5,733 3,996 Excess assets (statutory basis) 42,134 47,768 Statutory capital adequacy requirement (CAR) 13,202 15,303 Ratio of excess assets to CAR Notes: 1. Certain of the 2015 figures for inadmissible assets and limits in respect of group undertakings and the resulting calculations are estimates. 2. A reconciliation of the movement in excess of assets over liabilities on the published basis is provided in note The composition of the assets backing the CAR is 28% in local equities and 72% in local cash (2014: 12.5% local equities and 87.5% local cash). 4. The statutory policy liabilities for the remaining investment contracts with prospective liabilities have been aligned with the published policy liability valuation basis which resulted in a R5.1bn increase in statutory policy liabilities. As a result, the CAR has reduced due to a reduction in termination risk. Certification of statutory financial position I hereby certify that: the valuation on the statutory basis of the company as at 31 December 2015, the results of which are summarised above, has been conducted in accordance with, and this statutory actuary's report has been produced in accordance with, applicable Actuarial Society of South Africa professional guidance notes and Board Notice 14 of 2010; the company was financially sound on the statutory basis as at the valuation date, and in my opinion is likely to remain financially sound on the statutory basis for the foreseeable future; and the company also had sufficient non-linked assets to more than cover non-linked liabilities and capital adequacy requirements after allowing for the asset spreading requirements as prescribed by the Long Term Insurance Act. G W Voss Statutory Actuary BSc, FIA,FASSA Cape Town 04 April

10 Audit, Risk and Compliance Committee report The Audit, Risk and Compliance Committee is a committee of the Board of directors, and serves in an advisory capacity to the Board in discharging its duties relating to the safeguarding of assets, the operation of adequate systems, risk management and internal controls, the review of financial information and the preparation of the consolidated and company annual financial statements. This includes satisfying the Board that adequate internal, operating and financial controls are in place. Terms of reference The Audit, Risk and Compliance Committee has adopted formal terms of reference that have been updated and approved by the board of directors, and has executed its duties during the past financial year in compliance with these terms of reference. Composition and meeting process The current members are Ms C W N Molope (Chairman), Mr P G M Truyens and Ms N T Moholi. The committee comprises exclusively independent directors, and met five times during the year with senior management, including the chief executive officer, the statutory actuary, the finance director, the group audit director, the chief risk officer and certain other executive management. Representatives from Old Mutual plc also sometimes attend. The external and internal auditors attend these meetings and have unrestricted access to the committee and to its chairman. Ad hoc meetings are held as required. Statutory duties In execution of its statutory duties, as required in terms of the Companies Act of South Africa and the Long-term Insurance Act, during the past financial year the Audit, Risk and Compliance Committee has: Ensured the appointment as external auditor of the company of a registered auditor who, in the opinion of the Audit, Risk and Compliance Committee, was independent of the company. Determined the fees to be paid to the external auditor and such auditor s terms of engagement. Ensured that the appointment of the external auditor complies with the Companies Act of South Africa and any other legislation relating to the appointment of such auditors. Determined the nature and extent of any non-audit services which the auditor may provide to the company or such services that the auditor may not provide to the company or related company. Pre-approved any proposed contract with the auditor for the provision of non-audit services to the company. Considered the independence of the external auditors and has concluded that the external auditor has been independent of the company throughout the year taking into account all other non-audit services performed and circumstances known to the committee. Received and dealt appropriately with any complaints relating to the accounting practices and internal audit of the company, the content or auditing of its consolidated and company annual financial statements, the internal financial controls of the company, or to any related matter. Made submissions to the Board on any matter concerning the company s accounting policies, financial control, records and reporting. Legal requirements The Audit, Risk and Compliance Committee has complied with all applicable legal, regulatory and other responsibilities for the period under review. and company annual financial statements Following our review of the consolidated and company annual financial statements for the year ended 31 December 2015, we are of the opinion that, in all material respects, they comply with the relevant provisions of IFRS and the Companies Act of South Africa 71 of 2008 and that they fairly present the financial position at 31 December 2015 of the company and subsidiaries, joint ventures and associates and the consolidated results of operations and cash flows for the year then ended. C W N Molope Chairman of the Audit, Risk and Compliance Committee 04 April

11 Independent Auditor s report To the shareholders of Old Mutual Life Assurance Company (South Africa) Ltd We have audited the consolidated and company financial statements of Old Mutual Life Assurance Company (South Africa) Ltd, which comprise the statements of financial position at 31 December 2015, and the income statements and the statements of comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory notes, as set out on pages 10 to 108. Directors' Responsibility for the Financial Statements The company s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these financial statements present fairly, in all material respects, the consolidated and company financial position of Old Mutual Life Assurance Company (South Africa) Ltd at 31 December 2015, and its consolidated and company financial performance and consolidated and company cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa. Other reports required by the Companies Act of South Africa As part of our audit of the financial statements for the year ended 31 December 2015, we have read the Directors' Report, the Audit, Risk and Compliance Committee's report and the Certificate by the Company Secretary for the purpose of identifying whether there are material inconsistencies between these reports and the audited financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between these reports and the audited financial statements. However, we have not audited these reports and accordingly do not express an opinion on these reports. Report on Other Legal and Regulatory Requirements In terms of the IRBA Rule published in Government Gazette Number dated 4 December 2015, we report that KPMG Inc. has been the auditor of Old Mutual Life Assurance Company (South Africa) Ltd for 25 years, of which 10 years was in our capacity as joint auditors. KPMG Inc. Registered Auditor Per: G Dixon 1 Mediterranean Street Chartered Accountant (SA) Foreshore Registered Auditor Cape Town Director April

12 Income statements For the year ended 31 December 2015 Revenue Notes Company Year ended 31 December 2015 Year ended 31 December 2014 Year ended 31 December 2015 Year ended 31 December 2014 Gross earned premiums 3 43,523 35,001 46,653 35,875 Outward reinsurance 16 (1,076) (998) (1,209) (1,128) Net earned premiums 42,447 34,003 45,444 34,747 Investment income (net of investment losses) 5 39,507 65,004 46,013 66,400 Fee and commission income 6 4,984 4,130 6,445 5,783 Other income Total revenue 87, ,460 98, ,758 Expenses Claims and benefits (51,751) (54,622) (52,021) (54,903) Reinsurance recoveries 1, , Net claims incurred (including change in insurance contract provisions) (50,325) (54,151) (50,581) (54,362) Change in investment contract liabilities (18,566) (19,957) (22,250) (21,750) Finance costs 7 (1,387) (902) (1,710) (1,596) Commission and other acquisition costs 8 (4,309) (3,480) (4,900) (4,053) Operating and administration expenses 9 (9,089) (8,700) (11,739) (11,259) Change in third party interest in consolidated funds - - (3,374) (3,557) Total expenses (83,676) (87,190) (94,554) (96,577) Share of associates' and joint ventures' profit/(loss) after tax (37) Profit before tax 3,519 16,270 4,284 11,144 Income tax expense 11 (469) (2,994) (1,381) (3,308) Profit after tax for the financial year 3,050 13,276 2,903 7,836 Attributable to: Equity holders of the parent 3,050 13,276 2,906 7,838 Non-controlling interest - - (3) (2) Profit after tax for the financial year 3,050 13,276 2,903 7,836 10

13 Statements of comprehensive income Company Year ended 31 December 2015 Year ended 31 December 2014 Year ended 31 December 2015 Year ended 31 December 2014 Profit after tax for the financial year 3,050 13,276 2,903 7,836 Other comprehensive income Items that will not be reclassified subsequently to profit or loss Property revaluation Policyholder property revaluation (shadow accounting) (187) (82) (187) (82) Actuarial gains on defined benefit plans and return on plan assets Items that will be reclassified subsequently to profit or loss Currency translation differences on foreign operations (8) Other comprehensive income for the year net of taxation Total comprehensive income 3,165 13,372 3,420 7,921 Attributable to: Equity holders of the parent 3,165 13,372 3,423 7,923 Non-controlling interest - - (3) (2) 3,165 13,372 3,420 7,921 11

14 Statements of financial position At 31 December 2015 Assets Notes Company At 31 December 2015 At 31 December 2014 At 31 December 2015 At 31 December 2014 Intangible assets Investment property 13 1,947 3,673 17,949 17,235 Property and equipment 14 2,963 2,700 2,968 2,705 Deferred tax assets , ,111 Reinsurance contracts Post employment benefits Deferred acquisition costs ,216 1,225 Loans and advances Investment and securities , , , ,469 Investment in associates and joint ventures - - 1,569 1,116 Derivative assets 21 8,502 3,993 8,801 4,368 Amounts due by group companies 22 10,989 29,395 9,793 27,832 Other assets 23 7,121 5,557 15,107 10,427 Cash and cash equivalents 24 17,940 17,265 36,940 38,353 Non-current assets held for sale 25 2,017 2,800 3,267 2,800 Total assets 620, , , ,385 Liabilities Insurance contracts , , , ,648 Investment contracts , , , ,530 Third party interests in consolidated funds ,629 56,026 Borrowed funds 27 5,733 3,996 5,733 3,996 Share-based payment liabilities Deferred revenue on investment contracts Deferred tax liabilities 15 3,992 4,626 4,644 5,096 Derivative liabilities 21 12,588 5,323 12,804 5,561 Amounts due to group companies 22 1,848 1,397 4,222 3,113 Provisions 31 2,357 2,645 2,431 2,704 Current tax payable 526 1, ,778 Other liabilities 33 23,677 21,770 34,805 30,195 Total liabilities 572, , , ,446 Net assets 47,552 49,225 40,541 41,939 Shareholders equity Share capital and premium 34 6,423 6,423 6,423 6,423 Other reserves Share-based payment reserve Retained earnings 40,853 42,113 33,477 34,861 Equity attributable to holders of the parent 47,552 49,225 40,566 41,961 Non-controlling interest - - (25) (22) Total equity 47,552 49,225 40,541 41,939 12

15 Statements of changes in equity Company Share capital Share premium Other reserves Share-based payments reserve Total reserves Retained earnings Balance at 1 January , ,323 39,411 Profit after tax ,276 13,276 Other comprehensive income Dividends (3,510) (3,510) Other movements (48) (48) Total changes ,790 9,814 Total equity Balance at 31 December , ,113 49,225 Profit after tax ,050 3,050 Other comprehensive income Dividends (4,801) (4,801) Transfer between reserves (481) (481) Other movements (37) (37) Total changes (481) (413) (1,260) (1,673) Balance at 31 December , ,853 47,552 13

16 Statements of changes in equity Share capital Share premium Other reserves Share-based payments reserve Total reserves Retained earnings Noncontrolling interest Balance at 1 January , ,061 (20) 38,128 Profit after tax ,838 (2) 7,836 Other comprehensive income Dividends (3,870) - (3,870) Other movements (240) - (240) Total changes ,800 (2) 3,811 Total equity Balance at 31 December , ,861 (22) 41,939 Profit after tax ,906 (3) 2,903 Other comprehensive income Dividends (4,801) - (4,801) Transfer between reserves (481) (481) Other movements (17) - (17) Total changes (481) (11) (1,384) (3) (1,398) Balance at 31 December , ,477 (25) 40,541 14

17 Statement of cash flows For the year ended 31 December 2015 Company Notes Year ended 31 December 2015 Year ended 31 December 2014 Year ended 31 December 2015 Year ended 31 December 2014 Cash flows from operating activities Cash used in operations 35 (8,574) (8,397) (8,932) (9,043) Interest received 16,872 14,911 18,419 16,483 Dividends received 4,973 4,892 5,647 5,631 Interest paid (1,387) (902) (1,710) (1,596) Tax paid 36 (1,530) (2,127) (2,039) (2,348) Net cash from operating activities 10,354 8,377 11,385 9,127 Cash flows from investing activities Acquisition of property and equipment 14 (626) (216) (645) (219) Proceeds from disposal of property and equipment Acquisition of investment property 13 (1,652) (536) (2,161) (1,322) Proceeds from disposal of investment property 5,590 1,579 3,485 1,579 Acquisition of intangible assets 12 (151) (48) (152) (129) Proceeds from disposal of intangible assets Acquisition of investment in associate (1,344) - (1,344) - Net acquisition of financial instruments (8,812) (3,602) (9,299) (3,452) Net cash used in investing activities (6,878) (1,943) (9,997) (2,665) Cash flows from financing activities Issue of subordinated debt 5,000 1,000 5,000 1,000 Repayment of subordinated debt (3,000) - (3,000) - Dividends paid to company's shareholders 37 (4,801) (3,510) (4,801) (3,870) Net cash used in financing activities (2,801) (2,510) (2,801) (2,870) Net increase/(decrease) in cash and cash equivalents 675 3,924 (1,413) 3,592 Cash and cash equivalents at beginning of the year 17,265 13,341 38,353 34,761 Total cash and cash equivalents at end of the year 24 17,940 17,265 36,940 38,353 15

18 Accounting policies 1. Statement of compliance The consolidated and company annual financial statements have been prepared in accordance with International Financial Reporting Standards, and the Companies Act of South Africa. 1.1 Basis of preparation Assumptions and policies applied in consolidating the company s investment in subsidiaries and associates are set out below. The company financial statements refer to the financial statements of Old Mutual Life Assurance Company (South Africa) Ltd. The consolidated financial statements consolidate those of the company and its subsidiaries (together referred to as the group ) and equity account the group s interest in associates and joint ventures. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. The accounting policies for the consolidated and company financial statements are the same except as otherwise stated. The financial statements provide information about the financial position, results of operations and changes in the financial position of the group. They have been prepared under historical cost convention, as modified by the accounting policies below. The consolidated and company financial statements have been prepared on the going concern basis which the directors believe to be appropriate having taken into consideration the points as set out in the directors report. Judgements made by the directors in the application of these accounting policies that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note The consolidated and company financial statements are presented in South African Rands, which is the group and company s functional currency. The consolidated and company financial statements have been amended to reflect the introduction of the following amendments to standards: IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets Revaluation method proportionate restatement of accumulated depreciation/amortisation The amendments to IAS 16 and IAS 38 clarify that the revaluation can be performed, as follows: Adjust the gross carrying amount of the asset to market value or Determine the market value of the carrying amount and adjust the gross carrying amount proportionately so that the resulting carrying amount equals the market value. The amendments also clarify that accumulated depreciation/amortisation is the difference between the gross and carrying amounts of the asset. The adoption of this amendment did not have a material impact on the financial statements of the group or company. The amendments apply retrospectively and is effective for the financial period that commenced on 1 January IAS 19: Employee benefits The amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered instead of allocating the contributions to the periods of service. The amendments are relevant only to defined plans (post-employment plans or other long-term employee defined benefit plans) that involve contributions from employees of third parties meeting certain criteria. The amendments to IAS 19 introduce a relief that will reduce the complexity and burden of accounting for certain contributions from employees or third parties. When contributions are eligible for the practical expedient, a group is permitted (but not required) to recognise them as a reduction of the service cost in the period in which the related service is rendered. The amendments apply retrospectively for annual periods beginning on or after 1 July 2014 and does not have a material impact on the financial statements of the group or company. 16

19 Accounting policies 1.2 Group accounting In the company financial statements the company s investments in its subsidiaries, associates and joint arrangement companies are accounted for as financial assets through profit and loss and carried at fair value. Consolidation procedures The financial statements include assets, liabilities and results of the company and subsidiary undertakings.the results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated income statement from the commencement of control or up to the date of disposal. For subsidiaries acquired that are under common control, the company recognises the difference between the consideration transferred and the net asset value of the subsidiaries acquired as previously recognised by the transferring entity. Intra-group balances and transactions, income and expenses and all profits and losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are only eliminated to the extent that there is no evidence of impairment. Subsidiaries Subsidiary undertakings are those entities controlled by the group, which may form part of a corporation, trust, partnership or unincorporated entities, and where the substance of the relationship between the group and the entity indicates that the entity is controlled by the group. The group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the entity. Considerations in the assessment of control include: - the purpose and design of the investee; - what the relevant activities are and how decisions about those activities are made; - whether the rights of the group give it the current ability to direct the relevant activities; - whether the group is exposed, or has rights, to variable returns from its involvement with the investee; and - whether the group has the ability to use its power over the investee to affect the amount of investor's returns. The group continually assess any changes to the facts and circumstances to determine whether such entities should be consolidated. The group consolidates certain of its interests in open-ended investment companies, unit trusts, mutual funds and similar investment vehicles (collectively 'funds') in the event that the group has power to direct the relevant activities of a fund so as to obtain benefits from that fund, or for those auto pilot entities where the majority of benefits arising in a particular fund accrue to the group. The assets of consolidated funds are accounted for in accordance with the appropriate accounting policies for the assets in question. The amounts due to the balance of the investors in these funds are reported as a liability in the statement of financial position as, Third-party interests in consolidated funds'. Such interests are not recorded as non-controlling interests as they meet the liability classification requirement set out in paragraph 18 of IAS 32, Financial Instruments: Presentation. As stated in note 40, these liabilities are regarded as current, as they are repayable on demand, although it is not expected that they will be settled in a short time period. Associates An associate is an entity over which the group has significant influence but not control or joint control, through participation in the financial and operating policy decisions of the investee (and that is neither a subsidiary nor an investment in a joint venture). This is generally demonstrated by the group holding in excess of 20%, but less than 50%, of the voting rights. All the other factors, contractual or otherwise, are assessed in determining whether the group has the ability to exercise significant influence. The results, assets and liabilities of associates are incorporated in the consolidated financial statements using the equity method of accounting. The carrying amount of such investments is reduced to recognise any impairment in the value of individual investments. Where a group enterprise transacts with an associate of the group, unrealised profits and losses are eliminated to the extent of the group s interest in the relevant associate. Unrealised losses are eliminated in the same way but only to the extent that there is no evidence of impairment. 17

20 Accounting policies 1.2 Group accounting (continued) Investments in associates that are held with a view to subsequent resale are accounted for as non-current assets held for sale, and those held by policyholder investment-linked insurance funds are accounted for as financial assets fair valued through profit or loss. Joint arrangements A joint arrangement is a contractual arrangement of which two or more parties have joint control. Joint control exists when the decisions about the relevant activities require unanimous consent of the parties sharing control. There are two types of joint arrangements: - Joint operations are those operations where the group has rights to the assets, and the obligations for the liabilities, relating to the arrangement. The group will recognise its portion of the assets, liabilities, revenue and expenses. - Joint ventures are when the group have rights to the net assets of the arrangement. The group accounts for its interest using the equity method of accounting. The carrying amount of such investments is reduced to recognise any impairment in the value of the individual investments. Where a group enterprise transacts with a joint venture of the group, unrealised profits and losses are eliminated to the extent of the group s interest in the relevant joint venture. Unrealised losses are eliminated in the same way but only to the extent that there is no evidence of impairment. Investments in joint ventures that are held with a view to subsequent resale are accounted for as non-current assets held for sale, and those held by policyholder investment-linked insurance funds are accounted for as financial assets fair valued through profit or loss. 1.3 Revenue Revenue comprises premium income from insurance contracts (net of outward reinsurance premiums) and investment contracts with discretionary participating features, fee income from investment management service contracts, commission income and investment income (excluding investment losses). Revenue is accounted for in accordance with the following accounting policies. Premiums on insurance contracts and investment contracts with a discretionary participating feature Premiums receivable under insurance contracts and investment contracts with a discretionary participating feature are stated gross of commission, and exclude taxes and levies. Premiums are recognised when due for payment. Outward reinsurance premiums are recognised when due for payment. Revenue on investment management service contracts Fees charged for investment management services provided in conjunction with an investment contract are recognised as income in the income statement as the services are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over periods between 5 and 10 years. Commission income Commission income is accounted for on an earned basis. 18

21 Accounting policies 1.4 Insurance and investment contracts Classification of contracts Insurance contracts Contracts under which the group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder, or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder, are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a nonfinancial variable that the variable is not specific to a party to the contract. Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. If significant additional benefits would be payable in scenarios that have commercial substance, significant insurance risk exists even if the insured event is extremely unlikely or even if the expected present value of contingent cash flows is a small proportion of the expected present value of all the remaining contractual cash flows. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Contracts with a discretionary participating feature Contracts with a discretionary participating feature are those under which the policyholder holds a contractual right to receive additional payments as a supplement to guaranteed minimum payments. Those contracts that have insurance risk are classified as insurance contracts. Those that do not have insurance risk are classified as investment contracts. Investment contracts Contracts, under which the transfer of insurance risk to the group from the policyholder is not significant, are classified as investment contracts. Claims paid on contracts Claims and benefits incurred in respect of insurance contracts and investment contracts with a discretionary participating feature include maturities, annuities, surrenders, death and disability payments and are recognised in the income statement. Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and surrenders are accounted for when notified. Reinsurance recoveries are accounted for in the same period as the related claim. Amounts paid under investment contracts other than those with a discretionary participating feature are recorded as deductions from investment contract liabilities. Insurance contract and investment contracts with a discretionary participating feature Insurance contract liabilities and liabilities for investment contracts with a discretionary participating feature are measured using the Financial Soundness Valuation (FSV) method as set out in the guidelines issued by the Actuarial Society of South Africa in Professional Guidance Note (SAP) 104 (version 7). Under this guideline, provisions are valued using realistic expectations of future experience, with compulsory margins for prudence and deferral of profit emergence. Surplus allocated to policyholders under investment contracts liabilities with a discretionary participating feature but not yet distributed (i.e. bonus stabilisation reserves) is included in the carrying value of liabilities. 19

22 Accounting policies 1.4 Insurance and investment contracts (continued) Investment options and guarantees embedded in insurance contracts have been calculated on a market-consistent basis, with additional margins added as permitted by APN 110. The group performs liability adequacy testing on its liabilities under insurance contracts (including investment contracts with discretionary participating features) to ensure that the carrying amount of its liabilities is sufficient in view of estimated future cash flows. When performing the liability adequacy test, the group discounts all contractual cash flows and compares this amount to the carrying value of the liability at discounted rates appropriate to the business in question. Where a shortfall is identified, an additional provision is made. The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the income statement as they occur. These are described in more detail in notes 41 and 42. Whilst the directors consider that the gross insurance contract provisions and the related reinsurance recovery are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amount provided. The group applies shadow accounting in relation to certain insurance contract provisions where the measurement of the liability depends directly on the value of owner occupied property and the unrealised gains and losses on such property are recognised in other comprehensive income. Investment contracts (other than with discretionary participating feature) Liabilities under investment contracts without a discretionary participating feature are classified as financial liabilities at fair value through profit or loss. For unit linked and market linked contracts, this is calculated as the account balance, which is the value of the units allocated to the policyholder, based on the value of the assets in the underlying fund (adjusted for tax). For other contracts, the fair value of the liability is determined by reference to the fair value of the underlying assets, and is in accordance with the FSV method, except that negative rand reserves arising from the capitalisation of future margins are not permitted. The fair value of the liability is subject to the deposit floor such that the liability established cannot be less than the amount repayable on demand. Unbundling The group has elected to unbundle the deposit components of products where the deposit components can be measured reliably. The deposit components are classified as financial liabilities at fair value through profit or loss. Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the sale of contracts. Acquisition costs in respect of insurance contracts and investment contracts with a discretionary participating feature are expensed as incurred. The FSV method, used to value these contracts, makes allowance in the valuation for the charges to policyholders in respect of such acquisition costs; therefore no explicit deferred acquisition cost asset is recognised in the statement of financial position for these contracts. Costs incurred in acquiring investment management service contracts Incremental costs that are directly attributable to securing an investment management service contract are recognised as an asset to the extent they can be identified separately and measured reliably and it is probable that they will be recovered. Deferred acquisition costs are amortised over periods of between 5 and 10 years. 20

23 Accounting policies 1.5 Accounting for cell owners interest Through a specialised risk financing subsidiary, the Group provides cell captive facilities to clients. The cell captive facilities effectively ring fence the underwriting and declared investment results of insurance contracts introduced to the subsidiary by cell owners. Through participation agreements, the cell owners share in the risk and rewards of the insurance contracts. In the case of third party cells, the subsidiary is still the principal to the insurance contract, although the risks are transferred to the cell owner through the participation agreement. Consequently all gross premiums, claims and commissions are still reflected by the Group but then shown as equal and opposite reinsurance transactions outwards to reflect the transfer of the risk to the cell owner. The cell owners interest is classified as a liability and represents the accumulated funds attributed to cell owners. 1.6 Intangible assets Intangible assets, which represent developed software, are measured at cost on initial recognition. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets are amortised over their useful life of 3 years on a straight-line basis and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period, residual values and the amortisation method are reviewed at each reporting date. Changes in expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. An intangible asset arising from development expenditure on an individual project is recognised only when the group meets the following recognition criteria: demonstration of the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete and the ability to measure reliably the expenditure during the development. The carrying value of capitalised development costs is reviewed for impairment annually when the asset is not available for use or more frequently when an indication of impairment arises during the reporting year. Subsequent expenditure on capitalised intangible assets is capitalised only when it meets the criteria listed above. Research costs are expensed as incurred. 1.7 Investment property Real estate held to earn rentals or for capital appreciation or both, is classified as investment property. It does not include owneroccupied property. Investment properties are stated at fair value. Internal professional valuers perform valuations annually. For practical reasons, valuations are carried out on a cyclical basis over a twelve-month period due to the large number of properties involved. External valuations are obtained on such a basis as to ensure that substantially all properties are valued externally once every three years on a cyclical basis. In the event of a material change in market conditions between the valuation date and reporting date an internal valuation is performed and adjustments made to reflect any material changes in value. The valuation methodology adopted is dependent upon the nature of the property. Income generating assets are valued using discounted cash flows. Land holdings and residential flats are valued according to sales of comparable properties. Near vacant properties are valued at land value less the estimated cost of demolition. Property developments are valued in a similar manner to income generating assets except where information about future net income cannot be determined with sufficient confidence, in which case fair value will be estimated with reference to the value of the land and the cost of construction to date. Land is valued according to the existing zoning and town planning scheme at the date of valuation, with exceptions made by the value for reasonable potential of a successful rezoning. Surpluses and deficits arising from changes in fair value and rental income are reflected as investment income in the income statement. For owner occupied properties reclassified during the year from property and equipment (at revalued amounts) to investment property (at fair value), any increase in the carrying value of the property and equipment is accounted for as a revaluation in terms of IAS 16. If an impairment loss was recognised on this item of property and equipment in the past, the increase in value is used to recover the impairment loss previously recognised and any excess is accounted for as a revaluation. Any decrease in the carrying value of property and equipment is accounted for as a reduction against the specific revaluation reserve and any excess is accounted for as an impairment loss. 21